Virginia Short Sales are FAKE. Only 5% Close.

By
Real Estate Broker Owner with Northern Virginia Homes - FRANKLY REAL ESTATE Inc

 Update: This posting is oldy but a goodie(2/2008), More short sales are closing now, but this article still explains the process. Newer Short Sale postings here.

Most Short Sales are what I call "FAKE listings." Only 1 in 20 sells. In Arlington only 3 have sold out of 65 attempts.

I briefly went over Short Sales when I defined all SOL Homes including REOs, Bank Owned Etc. But Short Sales need more attention, as they are very tricky and misleading.

A Short Sale is a listing for sale that requires "Third Party Approval." That means that 1, or 2!!, banks are owed MORE than the list price. For example:

  1. Home is bought for $500,000 with 5%, or $25k down.
  2. Home has a $475,000 mortgage.
  3. Value dropped below $475,000
  4. If the seller is facing foreclosure, they slash their price for a quick sale
  5. A Short Sale is attempted at $450,000
  6. If the bank accepts it, the BANK eats $25,000 (see Phantom tax for Seller Update 2/2010: laws changed regarding this tax)

The Theory Behind Short Sales: Banks would be better off to accept a loss now, versus going through the legal expense of a foreclosure, just to end up selling it for less later. Win win, right? Wrong. Read on. Bank Trick 1: "Sure, we will consider a Short Sale, IF YOU KEEP PAYING US." Yep, a bank sees a desperate seller, and a potential $50,000 loss. They then mislead them into thinking that they might consider taking a bath on the deal IF the owner keeps paying their mortgage. The bank then ignores offers for 2-4 months in order to squeeze out another $2,000 x 4 or $8,000 profit. Brilliant. The bank then takes it over after foreclosure and sells it for $10,000 OVER the Short Sale List price. $18,000 better off, NOT doing a Short Sale. (Let's not forget the banks are losing their shirts too.) Bank Trick 2: Sometimes the bank has mortgage insurance and it is CHEAPER for them to let it foreclose versus allowing a Short Sale, which is NOT insured. For example, I was at an NVAR short sale class and a Realtor asked the speaker, "Why after 60 days, calling 2 times a day (120 calls) with a full price Short Sale offer, did the bank not call us back?" The speaker claimed it was due to an overworked staff.

I asked:

  1. Did they tell you they would consider a Short Sale IF you kept paying $3,000 a month? The answer was Yes.
  2. Was the home bought with Mortgage insurance? The answer was Yes.
  3. Bingo! Why eat $50,000, by accepting the low offer, if the bank a) gets $3,000 a month and b) is insured against a foreclosure and NOT a Short Sale.

She was pissed. She realized that she had been "had." But this goes on ALL THE TIME. It can take MONTHS to hear back.

Another example:

  1. A seller in Clarendon 1021 tries to sell his property and profit $30,000 at $600k. (Yeah right!)
  2. Then he drops it to $570,000. No bites, but the foreclosure is pending!
  3. They SLASH it to $530,000 (sidenote, I get flooded with calls from friend that want to pick it up for a steal at $470,000! I said that it was impossible... since I'd buy if that price was a possibility.)
  4. It sits for another month, then the listing disappears after 100 days!
  5. A month later it is "bank owned" and listed for $560,000
  6. It sells for $540,000 in 26 days.

The moral here is banks are not dumb and the market isn't so horrible that they will take all these lowball offers. They sold it for $10,000 OVER the previous list price (which probably had lower offers).

Short Sale Statistics:

Reston homes from $300k to $400k.
- 20 Active "Short Sales" in Reston (watch out for "Not a Short Sale" listings)
- 73 were Withdrawn, or Expired.
- 3 Under Contract (1 under contract since Nov 2007! Many UC do not close.)

Only 3 sold in the last 24 months. 3 closed sales in 100 attempts!

  1. Dropped From $480k to $400k, sold at $400k (Full list)
  2. Dropped from $430k to $400k sold for $380k (5% under list)
  3. Dropped from $380k to $350k sold for $345k (2% under list)

Arlington Short sales.
- 25 Actives
- 37 Withdrawn
Only 3 have sold in ALL price ranges in all of Arlington in the last 2 years.

  1. Listed at $335k, sold for $335
  2. Listed at 700k dropped to $620, sold for $600k
  3. Listed at 480k dropped to $420k sold for $420.

In Alexandria, only 8 have closed in 2 years out of 80 attempts. (most were at list, or 2% under list, some were $20k over list) I show this, so you don't think "Wow, they are desperate, we can now lowball. These 3 were the ONLY successful ones. Probably because they gave the bank a real offer.

Ok, so enough already with the War N Peace, what should I do?

Advice for Regular Sellers

  1. Do NOT blindly compete with a Short Sale. If you get an inexperienced agent, and they see 3 Short Sales in your neighborhood, and they have you compete against these "fake" listings, you can lose $25,000. Hope you "saved a ton" on that agent. (see Realtor Rebates)

Advice for Sellers Facing Foreclosure

  1. Watch out for the bank tricks to "keep paying." Talk to a lawyer that specializes in bankruptcy to help guide you. They MIGHT recommend stopping payments immediately and saving it up for a rental.
  2. Use an agent that has completed (as in CLOSED, not listed) at least 1 Short Sale.
  3. If you have mortgage insurance, be extra careful, the bank might prefer that you foreclose.
  4. Get bank approval for your list price before listing it. Put in the listing remarks "List Price approved." Otherwise you will get lumped into all the other Fake Listings and ignored by smart buyer agents.

Advice for Buyers looking for a "steal" (see "deals" post)

  1. Avoid Short Sales, or expect to wait 2-3 months and expect to put in 5-10 offers on Short Sales before one is accepted. A Short Sale in my building now has 4 offers. He says he is expecting a reply any day now... sorry, but yeah right!
  2. Look for Approved Short Sales. Ask if the bank has been contacted and if a price has been approved. Multiply time estimates by 4. Ie. 3 days= 12 days.
  3. Consider offering near, full or OVER list. What! Over list! Are you nuts! CNN says this is a BUYER's Market! I know it sounds crazy, but if you and your agent see the price is well under your other options... I've said time and time again, I'd rather you pay $10,000 OVER list on a house that is $50,000 under the competition versus "saving" $50,000 on a home that is overpriced by $100,000. Ignore list price, focus on VALUE.
  4. Focus on Bank Owned. These units get replies in a day or two. (See video of Realtor buying a Bank Owned property)

Advice for Buyer agents & Listing agents

  1. If you get one to close, change the remarks to SHORT SALE, NOT TO BE USED AS A COMP in hopes that the appraiser will take that into consideration and not trash the neighborhood (buyer agents, demand it of the listing agent to try to help your client's "deal" not turn into destroying his own investment).

Side note: A home should NOT go under contract until the BANK signs it, but many agents will make this mistake. The seller signing it means nothing, and it should stay on the market as Active.

  • Updated Correction 2-29-08 I'd like to thank DAAR CEO Jeanette Newton for this correction. I'm excited that she is participating in blogging!
  • My above sidenote about when to go Under Contract is 100% wrong. So let me explain... IF a seller signs the offer, as written, it is to be listed by default on the MLS as Under Contract with No Kick Out. The problem for the seller is that most MLS websites will remove the listing, so the chance of a better offer (and a higher chance for the bank to accept) is slim to none.

    Here are a sellers' options (please comment if you know of more options) :

  • 1) A seller can counter the contract and add in a "Kick Out" so further offers can be reviewed. The listing then can be set to Under Contract with Kick Out (this was suggested by Loudoun Realtor Tony Arko). But only a buyer agent looking on the back end MLS can find UC/KO. (A Kick Out means "there is still a major contingency here, feel free to submit another offer, it still can be considered and the first contract might be kicked out.")
  • 2) Another way to keep it active (like the unit in my building with 4 offers) is for the seller to send the "offers" unsigned to the bank. Why not try and keep your home as "Active" for as long as possible? Some banks will require the seller to sign, so try #3.
  • 3) Or lastly, the seller might add "acceptance of the contract is contingent on lender approval." or "contingent upon review and approval of the lender." That one line can keep it "Active." I am not a lawyer, so please verify any additions you make to a contract with a lawyer.

    As a buyer agent I would prefer it to be "Under Contract" if I was the listing agent, I would want it to be Active. So it depends whose side I am on, it is part of the negotiations. You can even counter with "Increase your price $2,000 and we will place it UC/KO."

  • Conclusion: Short sales suck.

    -Written by Frank Borges LL0SA- Broker FranklyRealty.com
    (please report typos)

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    Virginia Foreclosures Short Sales and REO (and Pre-Foreclosures)
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    Comments 44 New Comment

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    Rainer
    27,578
    Billy Burke
    CAI - AARE
    The Auctionarium, Inc

    Folks:

    I think that any professional working in the marketplace realizes that this was close to being true when posted in 2008 and it shows how the short sale marketplace has matured in the past 25-months.

    The new TARP HAMP HAFA rules on processing short sales only applies to homes that were in the loan modification program where the borrower still cannot make the payments.

    People within the industry and at Treasury who manage the program are still sceptical that any lenders will be able to comply with the 10-day turn around timelines when they come into effect April 5th.

    The good news is there are now for the first time some sort of federal guidlines on how to process a short sale, what is required and how long it should take.

    In 2007 to 2008 90% of our short sale offers were rejected.

    100% of those homes were subsuquently foreclosed upon incurring additional costs of $50,000 to $70,000 per home and most sold for at least $100,000 less than we offered for a short sale. Several sold for $300,000 to $500,000 less than we offered.

    This post on Active Rain is not costing anyone lost short sale business, lets get real.

    What can you do about those "lost deals" when looking at them in your rearview mirror?

    Not much...

    If any of you agents have deals like that please write me a one or two page summary and e-mail it to me.

     

    March 08, 2010 10:33 AM
    Rainmaker
    162,126
    Lorinda Ward
    Serving, Hampton Roads Virginia. Norfolk, Chesapeake, Va Beach
    Keffer Realty

    This is still a great post.  Very informative, it actually got me riled up.  Thank you for sharing.

    March 16, 2011 09:07 PM
    Rainer
    332,837
    Paul Gapski
    619-504-8999,#1 Resource SD Relo
    Berkshire Hathaway / Prudential Ca Realty

    Well sometimes i dont know what to think of short sales. They are getting better and then they are not!

    August 07, 2011 01:58 AM
    Rainer
    332,837
    Paul Gapski
    619-504-8999,#1 Resource SD Relo
    Berkshire Hathaway / Prudential Ca Realty

    Well sometimes i dont know what to think of short sales. They are getting better and then they are not!

    August 14, 2011 12:28 AM
    Anonymous #47
    Anonymous
    Martha L

    Thank you for telling the truth. As a buyer of a short sale that did not close I wasted time, money and have not yet gotten my security deposit back. I thought that I asked the right questions before heading down the short sale path but because it is so complex one really needs to fully understand all the caveats and not assume that the realtor or settlement agent has the necessary experience to make it happen.

     

    In my situation I was told the lender was Wells Fargo. Because the buyer has no access to the loan information of the seller there was no way I could verify this without the seller’s permission, so I had to trust my realtor to give me the correct information. There was also a jr lien holder that explicitly stated in the short sale agreement that they would not release the seller from their debt. Wells Fargo told the seller in their short sale agreement to work with the jr lien holder immediately after being approved to resolve transactions. The seller had a whole month to resolve the issues.

     

    I was led to believe we were ready to settle. A date was set, I met all my commitments including obtaining homeowners and flood insurance, obtained a cashier's check for my closing costs, got in my car and headed to the settlement office. Two thirds of the way there I received a text that the settlement would not take place. The HUD1 was not accepted because jr lien holder refused to release the seller of her debt. It turns out the mortgage was owned by Fannie Mae and Wells Fargo was the loan servicer. Fannie Mae has their own set of rules for short sales. If the jr lien holder accepts the $6000 dollars payment they must release the seller from their debt.

     

    Neither party would budge. There were 6 days left before my loan lock-in expired and interest rates were headed up. The seller and settlement agent wait until my lock expires, they wait until the short sale agreement with the jr lien holder expires and then tell me that the buyer is now going to borrow money from her son to pay the jr lien holder.

     

    I asked for my security deposit plus expenses back as the seller failed to follow the time is of the essence clause by not negotiating with the jr lien holder sooner. Also I was misinformed about the owner of the loan and the short sale agreement as written never would have closed under the Fannie Mae guidelines.

     

    The worst part is that the realtor then asked me to sign a release saying that “buyer financing” was the reason for the short sale failure. I have refused to sign this and have asked again for my security deposit plus expenses or we can go to mediation. I am still waiting for an answer.

     

    My take is short sales are a bad deal for the buyer and don't hold the seller to any obligation to perform according to the terms of the short sale agreement. Also don’t expect any help from the lenders, servicers or realtors when things go bad.

     

    Lesson learned - I will never again agree to a short sale.

     

    July 23, 2013 09:04 PM
    Anonymous
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    Rainmaker
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    FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com

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